LS 3.60 and LS 3.

60A
PSA 530. AUDIT SAMPLING
Auditing and Assurance Services

 Audit Sampling
Why does the auditor need to do sampling?
 Audit sampling – also widely known to reduce the risk of ‘over-auditing’ in certain areas,
and enables a much more efficient review of the working papers at the review stage of
the audit

1. The nature and materiality of the balance or class does not demand a 100% audit
2. A decision must be made about the balance or class
3. The time and cost to audit 100% of the population would be too great

10 Steps of Audit Sampling Process

1. Define the Objective (purpose) of test
 The test objective is based on the RMM at assertion level that guide in designing
the appropriate audit procedures necessary to achieve the objective

2. Define the deviation or misstatement

 The auditor considers what condition constitute a deviation or misstatement by
reference to test objective
 Test of Controls (TOC) : a deviation is a departure from adequate control performance
Ex. Sales invoice not supported by credit approval report and a shipping document
 Test of Details (TOD) : a misstatement is a difference between recorded amount and
the amount the auditor determines to be appropriate
Ex. Recorded receivable relating to fictitious sale from a prematurely recognized
sale

3. Identify the relevant audit universe/population

 Auditor identifies the relevant population and its characteristics such as:
A. Direction of Testing
 TOC: direction of deviations determines the relevant popualtion
 TOD: stratification or value weighted selection (monetary unit
sampling)
– direction of misstatement
B. Completion of Population
 Completeness is verified by its boundaries (beg. & end) and totality

Example:
Accounts Receivable Stratification A/R balance = P181,000,000
Strata Average Amount No. of Customers Sample Size
1 Over P1,000,000 50 50
2 P100,000- 200 50
P1,000,000
3 Below P100,000 500 25
Total 750 125
 If not stratified, this sample size would have been greater in order to reduce
sampling risk
 Assumption: Presence of misstatement is projected for each stratum
4. Determine the relevant sampling unit
 Sampling Unit – the individual items constituting a population
 Sampling units depend on the chosen population
Ex.:
If the population is 1,00 customers; each customer = sampling unit
If the population is 5,000 sales invoices, 1 sales invoice = sampling unit

5. Select the appropriate sampling approach

Overview:
Select the appropriate sampling approach

Attributes Variables Sampling in

Sampling in TOC TOD

Non-
Statistical Statistical Nonstatistical
Statistical

Monetary Unit
Regular Classical
Sampling

Mean per
Discovery
unit

Sequential Difference

Ratio

Attributes Sampling in TOC

 Regular : Conclusion is reached about a population in terms of a rate (frequency)
of occurrence based on a fixed sample size
Ex. Sample Check Voucher – examined the signatures, evidencing approvals
# of missing signatures = deviations, used to estimate the overall rate of
exceptions for the entire (population) check vouchers
 Discovery : sampling plan to determine enough sample size (fixed sample size)
required to have a probability of discovering at least one (critical) deviation
Expected deviation rate = zero or near zero; any deviation detected results in
rejection of the sampling plan
 Sequential Stope-or-Go : Sampling plan is performed by stage; no fixed sample
size is set
The result of the previous stage determines the need to go to next stage

Statistical Variables Sampling for TOD

 Classical
Generally, answers the following questions:
1. How much?
2. Is the account materially misstated?
Carrying Value – Audited Amounts = Difference (sample misstatement)
 3 variations: MPU, Difference Approach or Ratio Approach
  Monetary Unit Sampling
 Sample size, selection and results evaluation are terms of monetary
amounts and is appropriate for testing: assets, income

6. Determine the sufficient sample size

 Auditor shall determine a sample size sufficient to reduce sampling risk to an
acceptably low level
 Level of sampling risk (beta risk or type II misstatement), auditor is willing to accept
is inversely related to sample size

↓ the sampling risk, the ↑ the sample size to achieve = ↑ level of confidence

7. Select the representative sample items

Key Probability Non-Probability Sampling
Probability sampling is a sampling Nonprobability sampling is a
technique, in which the subjects method of sampling wherein,
of the population get an equal it is not known that which
Meaning
opportunity to be selected as a individual from the
representative sample population will be selected as
a sample
Alternately
Random sampling Non-random sampling
known as
Basis of selection Randomly Arbitrarily
Opportunity of
Fixed and known Not specified and unknown
selection
Research Conclusive Exploratory
Result Unbiased Biased
Method Objective Subjective
Inferences Statistical Analytical
Hypothesis Tested Generated

8. Perform the testing and evaluate evidence

 Auditor shall perform audit procedures, appropriate to the purpose, on each item
selected, and evaluate the audit evidence obtained
In doing so, the auditor may encounter:
 Voided sample – not applicable to the selected item
- Auditor shall perform procedure on a replacement item
- Ex.: voided check is selected while testing payment
authorization
 Missing or Lost Sample

9. Evaluate the test results and reach conclusion

 Whether the sampling is statistical or non-statistical, the auditor applies
professional judgment in evaluating the results and reaching an overall conclusion
by considering:
A. Nature, causes, and effect of deviations and misstatements
- Investigate whether the deviations or misstatements is systematic
or indicate the possibility of fraud, which may require extended
audit procedures
B. Deviations and misstatements
 10. Complete documentation
 All the processes, procedures, and techniques used must be documented

Types of Audit Sampling

Statistical Sampling
 More effective due to aid of
statistics/mathematics
 More objective
Advantages  Design an efficient sample
 Measure the sufficiency of
evidence obtained
 Quantify sampling risk
 Overvalue the evidence
 Reduces auditor’s skepticism
 Increased cost due to:
- Training auditors
Disadvantages - Sampling software
 Time to design and conduct
sampling application
 Lack of consistent application
across audit teams
 Random sampling
 Systematic sampling
 Monetary unit sampling : is a
value-weighted sampling that
each dollar in a population has
an equal chance to be selected
Non-Statistical Sampling
 Easy to apply and less costly
 Can be as effective as statistical
if appropriate judgment is
applied
 Less objective
 Relies exclusively on
professional judgment to:
- Determine sampling
size
- Evaluate sample
results
- Estimate sampling risk
 Haphazard sampling : select
items on an arbitrary basis, but
without any conscious bias
 Block selection : block sample
consists of all items in a
selected time period,
numerical sequence or
alphabetical sequence (useful
for ex.: tracing credits from AR
to CR/other sources looking for
fictitious credits)

Questions to answer? (sampling)

 Which population must be tested? (population) Why?
 How many items should be included in the sample? (sample size)
 Which item should be included? (selection process)
 What does the sample information tell about the population as a whole? (evaluation)

Sampling as a Function of Internal Control

Alpha Risk
(Type I Misstatement)
Test of Control (TOC)
Sampling risks Assessing control risk too high
Controls are… Ineffective when they are
actually effective
Control reliance Under reliance
Test of Details (TOD)
Sampling risks Incorrect rejection
Material misstatement… Exist when in fact it does not
Beta Risk
(Type II Misstatement)
Assessing control risk too low
Effective when they are
actually not or ineffective
Over-reliance
Incorrect acceptance
Does not exist when in fact it
 does
Affects audit.. Efficiency Effectiveness
additional work/procedures inappropriate audit opinion

Tolerable and Expected Error

 Once the desired confidence level is established, the sample size is determined largely by
how much the tolerable error exceeds expected error

Precision, at the planning

stage of audit sampling, is the Allowance for
difference between the sampling risk
expected and tolerable
deviation rates

Dealing with Sampling Risks (how does the auditor reduces sampling risk to an acceptably low
level?)
 Increase sample size and use of appropriate sample selection method

Sampling and Non-sampling Risks

Sampling Risks
Risk that auditor reaches an incorrect
conclusion because the sample is not
representative of the population
Inherent limitations as part of audit sampling
Controlled by:
 Determining the appropriate sample size
 Ensuring that all items have an equal
opportunity of selection
 Mathematically evaluating sample
results
Non-sampling Risks
Risk that the audit tests do not uncover
existing exceptions in the sample
The auditor’s failure to recognize exception;
inappropriate or ineffective audit procedures
Controlled by:
 Training and supervision
 Reasonable working conditions
 Efforts

Selecting and Examining

This is appropriate when:
 The population constitutes a small number of large-value items;
All items  There is a significant risk, and other means do not provide
(100% examination) sufficient appropriate audit evidence; and
 CAATs can be used in a larger population to electronically test a
repetitive calculation or other process
Specific items This is appropriate for:
 High-value key items that could individually result in a material
misstatement;
 All items over a specified value;
 Any unusual or sensitive items or financial statement
disclosures;
 Any item that are highly susceptible to misstatement;
 Items that will provide information about matters such as the
nature of the entity, the nature of transactions, and internal
 control; and
 Items to test the operation of certain control activities
This is appropriate for reaching a conclusion about an entire set of
data (population) by selecting and examining a representative sample
Representative
of items within the population
sample of items
Sampling enables the auditor to obtain and evaluate audit evidence
from the population
about specified characteristics. The determination of sample size may
be made using either statistical or non-statistical methods

Examples of Factors Influencing Sample Size for Tests of Controls

Factor Effect on Sample Size
1. An increase in the extent to which the auditor’s risk assessment
Increase
takes into account relevant controls
2. An increase in the tolerable rate of deviation Decrease
3. An increase in the expected rate of deviation of the population
Increase
tested
4. An increase in the auditor’s desired level of assurance that the
tolerable rate of deviation is not exceeded by the actual rate of Increase
deviation in the population
5. An increase in the number of sampling units in the population Negligible effect
6. An increase in the auditor’s assessment of the RMM Increase
7. An increase in the use of substantive procedures directed at the
Decrease
same assertion
8. An increase in the auditor’s desired level of assurance that tolerable
misstatement is not exceeded by actual misstatement in the Increase
population
9. Stratification of the population when appropriate Decrease

Testing Procedures Which do not Involve Sampling

1. Tests performed on 100% of the items within a population
2. Inquiry and observation
a) Procedures that depend on segregation of duties or no documentary evidence
b) Tracing transaction/s to obtain understanding of an accounting system and its
internal control
3. Analytical procedures
Audit Evidence – To Sample or Not?
Type of Evidence Audit Sampling Commonly Used?
Inspection of tangible assets Yes
Inspection of records or documents Yes
Reperformance Yes
Recalculation Yes
Confirmation Yes
Analytical Procedures No
Scanning No
Inquiry No
Observation No

 PSA 530. Important Paragraphs

SCOPE OF THIS PSA
 1. This Philippine Standard on Auditing (PSA) applies when the auditor has decided to use
audit sampling in performing audit procedures. It deals with the auditor’s use of
statistical and non-statistical sampling when designing and selecting the audit sample,
performing tests of controls and tests of details, and evaluating the results from the
sample.
2. This PSA complements PSA 500 (Redrafted),1 which deals with the auditor’s responsibility
to design and perform audit procedures to obtain sufficient appropriate audit evidence to
be able to draw reasonable conclusions on which to base the audit opinion. PSA 500
(Redrafted) provides guidance on the means available to the auditor for selecting items
for testing, of which audit sampling is one means.

OBJECTIVE
4. The objective of the auditor when using audit sampling is to provide a reasonable basis
for the auditor to draw conclusions about the population from which the sample is
selected.

DEFINITIONS
(a) Audit sampling (sampling) – The application of audit procedures to less than 100% of
items within a population of audit relevance such that all sampling units have a
chance of selection in order to provide the auditor with a reasonable basis on which
to draw conclusions about the entire population.
(b) Population – The entire set of data from which a sample is selected and about which the
auditor wishes to draw conclusions.
(c) Sampling risk – The risk that the auditor’s conclusion based on a sample may be different
from the conclusion if the entire population were subjected to the same audit
procedure.
(d) Non-sampling risk – The risk that the auditor reaches an erroneous conclusion for any
reason not related to sampling risk.
(e) Anomaly – A misstatement or deviation that is demonstrably not representative of
misstatements or deviations in a population.

Consider Point
Anomalies
There may be a temptation to regard some misstatements/deviations (discovered in a
sample) to be an anomaly (not representative of the population) and exclude them when
projecting misstatements in the population. However, additional audit work is required,
regardless of whether the misstatement/ deviation is or is not representative of the
population:
 If the deviation is representative of the population, the auditor shall investigate the
nature and cause, and evaluate their possible effect on the purpose of the audit
procedure and on the other areas of the audit.
 If the deviation is considered an anomaly, the auditor shall obtain a high degree of
certainty that such misstatement or deviation is not representative of the
population. This requires performing further audit procedures to obtain sufficient
appropriate evidence that the misstatement or deviation does not affect the
remainder of the population

(g) Statistical sampling – An approach to sampling that has the following characteristics:
(i) Random selection of the sample items; and
(ii) The use of probability theory to evaluate sample results, including
measurement of sampling risk.
 A sampling approach that does not have characteristics (i) and (ii) is considered non-
statistical sampling.
(h) Stratification – The process of dividing a population into sub-populations, each of which
is a group of sampling units which have similar characteristics (often monetary
value).
(i) Tolerable misstatement – A monetary amount set by the auditor in respect of which the
auditor seeks to obtain an appropriate level of assurance that the monetary amount
set by the auditor is not exceeded by the actual misstatement in the population.
(j) Tolerable rate of deviation – A rate of deviation from prescribed internal control
procedures set by the auditor in respect of which the auditor seeks to obtain an
appropriate level of assurance that the rate of deviation set by the auditor is not
exceeded by the actual rate of deviation in the population.

REQUIREMENTS
Sample Design, Size and Selection of Items for Testing
6. When designing an audit sample, the auditor shall consider the purpose of the audit
procedure and the characteristics of the population from which the sample will be drawn.
(Ref: Para. A4-A9)
7. The auditor shall determine a sample size sufficient to reduce sampling risk to an acceptably
low level. (Ref: Para. A10-A11)
8. The auditor shall select items for the sample in such a way that each sampling unit in the
population has a chance of selection. (Ref: Para. A12-A13)

Performing Audit Procedures

9. The auditor shall perform audit procedures, appropriate to the purpose, on each item
selected.
10. If the audit procedure is not applicable to the selected item, the auditor shall perform the
procedure on a replacement item. (Ref: Para. A14)
11. If the auditor is unable to apply the designed audit procedures, or suitable alternative
procedures, to a selected item, the auditor shall treat that item as a deviation from the
prescribed control, in the case of tests of controls, or a misstatement, in the case of tests of
details. (Ref: Para. A15-A16)

Nature and Cause of Deviations and Misstatements

12. The auditor shall investigate the nature and cause of any deviations or misstatements
identified, and evaluate their possible effect on the purpose of the audit procedure and on
other areas of the audit. (Ref: Para. A17)
13. In the extremely rare circumstances when the auditor considers a misstatement or deviation
discovered in a sample to be an anomaly, the auditor shall obtain a high degree of certainty
that such misstatement or deviation is not representative of the population. The auditor
shall obtain this degree of certainty by performing additional audit procedures to obtain
sufficient appropriate audit evidence that the misstatement or deviation does not affect the
remainder of the population.

Projecting Misstatements
14. For tests of details, the auditor shall project misstatements found in the sample to the
population.

Evaluating Results of Audit Sampling

15. The auditor shall evaluate:
(a) The results of the sample; and (Ref: Para. A21-A22)
 (b) Whether the use of audit sampling has provided a reasonable basis for conclusions
about the population that has been tested. (Ref: Para. A23)

APPLICATION AND OTHER EXPLANATORY MATERIAL

Non-Sampling Risk (Ref: Para. 5(d))
A1. Examples of non-sampling risk include use of inappropriate audit procedures, or
misinterpretation of audit evidence and failure to recognize a misstatement or deviation.
Sampling Unit (Ref: Para. 5(f))
A2. The sampling units might be physical items (for example, checks listed on deposit slips,
credit entries on bank statements, sales invoices or debtors’ balances) or monetary units.
Tolerable Misstatement (Ref: Para. 5(i))
A3. When designing a sample, the auditor determines tolerable misstatement in order to
address the risk that the aggregate of individually immaterial misstatements may cause the
financial statements to be materially misstated and provide a margin for possible
undetected misstatements. Tolerable misstatement is the application of performance
materiality, as defined in PSA 320 (Revised and Redrafted), to a particular sampling
procedure. Tolerable misstatement may be the same amount or an amount lower than
performance materiality.

Sample Design (Ref: Para. 6)

A4. Audit sampling enables the auditor to obtain and evaluate audit evidence about some
characteristic of the items selected in order to form or assist in forming a conclusion
concerning the population from which the sample is drawn. Audit sampling can be applied
using either non-statistical or statistical sampling approaches.